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Monday, July 18, 2016

Indian Land Oil and Gas Development and The Bureau of Land Management’s Mishandling of Royalty Payments to Indian Tribes

Political Science

Summer 2016

Policy Paper

Indian Land Oil and Gas Development

and The Bureau of Land Management’s

Mishandling of Royalty Payments to Indian Tribes

Background of Bureau of Land Management’s (BLM) management of gas and oil drilling on Indian land.

The development of Indian-owned oil and gas resources is one of the largest revenue generators in Indian country, and individual Indian mineral owners may rely on royalty payments from such development to pay for living expenses. Various offices within the Department of the Interior are responsible for management and oversight of oil and gas development on Indian lands. In some cases, Indian-owned resources cannot be developed independently. In those cases, BLM reviews a revenue- sharing agreement known as a communization agreement or CA, and the Bureau of Indian Affairs (BIA) approves it.

Source: 2016 GAO Report Indian Affairs Revenue Sharing

Current Status of Oil and Gas Development on Indian Lands

“In 2012 alone, energy and mineral resources generated over $701 million in royalty revenue paid to Indian mineral owners. Income from energy and minerals is by far the largest source of revenue generated from Trust lands. In the last three years, agencies working with BIA realty staff has assisted Tribes in the negotiation of 48 leases for oil and gas, totaling approximately 2,750,000 acres and about $45 million in bonuses. These leases have the potential to additionally produce over $20 billion in revenue to the Indian mineral owner over the life of the lease through royalties and working interests. In 2013, BIA estimates Indian Royalty to be approximately $900 million, and within two years, estimates royalty income will increase to over $1 billion.”

Source: BIA Oil and Gas Development Report

“Domestic onshore oil and gas development is governed by a framework of federal, state, tribal, and local laws and regulations, including the BLM, the BIA, and the Office of Natural Resource Revenue (ONRR), as well as the Environmental Protection Agency (EPA). State regulatory agencies have responsibility for oversight and management of oil and gas development on federal or Indian lands. BLM has overseen the development of federal and Indian oil and gas resources for decades and is responsible for ensuring that these resources are developed in a timely, economically efficient, and environmentally sound manner.

BLM’s responsibilities include reviewing drilling plans and issuing permits for wells developing federal and Indian resources; inspecting wells to ensure compliance with environmental, safety, and other regulations; approving revenue- sharing agreements like the CA’s for federal and Indian resources; and ensuring the maximum recovery of federal and Indian resources.”

Source: 2016 GAO Indian Energy Development Full Report

Oil and Gas Resource Ownership in the United States

“The United States has a unique legal and political relationship with Indian tribes and Alaska Native entities as provided by the Constitution of the United States, treaties, court decisions and Federal statutes. Within the government-to-government relationship, Indian Affairs provides services directly or through contracts, grants, or compacts to 567 Federally recognized tribes with a service population of about 1.9 million American Indian and Alaska Natives. While the role of Indian Affairs has changed significantly in the last three decades in response to a greater emphasis on Indian self-governance and self-determination, Tribes still look to Indian Affairs for a broad spectrum of services.

Programs administered through the Bureau of Indian Affairs include social services, natural resources management on trust lands representing 55 million surface acres and 57 million acres of subsurface minerals estates, economic development programs in some of the most isolated and economically depressed areas of the United States.”

Current Issues with Distributing Royalties to Indian Tribes in a Timely Manner

“In fiscal year 2015, the development of Indian-owned oil and gas resources generated more than $1 billion in revenue for tribes and individual Indian mineral owners, according to the Department of the Interior, making oil and gas resources one of the largest revenue generators in Indian country. For some tribes, energy development is the foundation of their economy and the primary source of funding for education, infrastructure, and other public services. In addition, according to a report by Interior, individual Indian oil and gas resource owners rely on revenue from oil and gas development to pay for living expenses, such as food, shelter, health care, and education.

The development of Indian oil and gas resources is governed by a number of federal laws, such as the Indian Mineral Leasing Act. To promote conservation and efficient utilization of minerals, Interior approves CAs when an Indian lease cannot be independently developed and operated in conformity with established well spacing rules. In these cases, leases are consolidated to form a single spacing unit, and a CA is established to identify production allocation for the purpose of distributing revenue from oil and gas development in the form of royalties based on each mineral owner’s percentage of ownership in that unit. Without an approved CA, royalties cannot be distributed to individual Indian mineral owners.

In recent years, advances in hydraulic fracturing and horizontal drilling, along with favorable economic conditions, resulted in significant increases in oil and gas development from shale formations, according to Interior and the Department of Energy’s Energy Information Administration. Although prices for crude oil and natural gas have since declined, the leasing of Indian oil and gas resources continues in some areas of the country, as evidenced by ongoing lease sales held by BIA agency offices. According to a report by Interior, BIA has struggled to keep up with the demand for oil and gas leasing, permitting, and drilling. The number of CA applications submitted has surpassed BIA’s and BLM’s ability to review and approve them in some areas of the country. For example, one oil and gas operator told us that during the boom period they held almost $7 million in oil and gas royalties in an escrow account for Indian mineral owners because BIA and BLM delays in processing the CAs prevented ONRR from accepting payments from operators for the distribution of royalties to Indian mineral owners.

Our past reports have highlighted the importance of Interior’s role in the management and oversight of federal and Indian energy resources and identified some challenges with the current system. In a May 2014 report, we found that BLM was not able to review CAs within required time frames, creating delays in the payment of royalties to the federal government, tribes, and individual Indian mineral owners. In that report, we recommended that Interior identify and take necessary steps to ensure that CAs are reviewed within required time frames, and Interior generally agreed with our recommendation. In addition, in a June 2015 report, we found that BIA could not ensure that its review process for energy-related documents was transparent or that such documents were moving forward in a timely manner. In that report, we recommended that Interior improve its review process by developing a documented process to track its review and response times. Interior did not fully concur with our recommendation, but stated in a letter to us in August 2015 that BIA would try to implement a tracking and monitoring effort within its system of records for oil and gas leasing documents.

In this context, you asked us to examine Interior’s review and approval process for CAs that include Indian leases. This report examines the actions Interior has taken to improve the timeliness of its review and approval of Indian CAs and the results of these actions.

We also examined laws and regulations that pertain to Interior’s role in the review and approval of Indian CAs. We interviewed BIA, BLM, ONRR, and other Interior officials at the headquarters and field levels who were familiar with the former CA review and approval process, as well as the proposed changes to this process. We selected officials from BIA and BLM field offices from various areas of the country that experienced a surge in oil development, which could result in an increase in demand for the review and approval of CAs.” Source: 2016 GAO Indian Energy Development Full Report

Increased Level of Support to Tribes and Individual Indian Mineral Owners

The main issues facing Indian Tribes and BIA agency staff are how to keep up with the demand for leasing, permitting and drilling. A taste of things to come has already occurred in development of the prolific Bakken shale oil play at the Fort Berthold Indian Reservation in North Dakota. There was a severe backlog of leases and permits being issued which forestalled the generation of income to the Indian mineral owners. BIA agency and DEMD staff have worked to eliminating this backlog by providing an experienced engineer and by hiring five additional staff to supplement BIA realty staff. By working together BIA and DEMD has been able to physically place a team of technical staff at the reservation to provide on‐site services. Staff functions included realty specialists, environmental specialists and petroleum engineers.

The level of drilling activity continues to increase from 150 wells drilled to 200 additional wells planned. That represents a doubling of work load that is expected to continue, with development rates leveling off to 100 wells per year over the next 5 years.

Source: BIA Oil and Gas Development Report

“In conclusion, BIA and BLM issued revised guidance in an effort to streamline the review and approval process for Indian CAs. However, a number of factors will limit BIA’s ability to ensure that the resulting actions have had a positive effect on the process and lead to the more timely review and approval of Indian CAs. Specifically, as Interior has not established required time frames by which an Indian CA should be reviewed and approved, BIA will be limited in its ability to hold offices accountable to ensure that Indian CAs are reviewed and approved in a timely manner. In addition, because BIA does not have a systematic mechanism to track an Indian CA through the process, it will be unable to fulfill its monitoring role to ensure that CAs are reviewed and approved in a timely manner. Finally, because Interior does not have a plan to assess the results of its revised guidance on the Indian CA process, the agency will be unable to determine whether it has achieved its policy objectives, such as decreasing the time needed to review and approve Indian CAs, designed to result in the more timely disbursement of royalties to Indian mineral owners. Without the ability to assess the effect of its revised guidance on the Indian CA review and approval process, Interior may not have enough information to make further improvements, if needed, to the process.”